Summary of Significant Accounting Policies | Note 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. Unless otherwise indicated, references to “FY 2016,” “FY 2017” and “FY 2018” are to the fiscal years ended June 30, 2016, 2017 and 2018, respectively. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Foreign Currency Translation The Company’s functional currencies for its foreign operations are the respective local currencies, the Australian (“AUS”) and New Zealand (“NZ”) dollars in the Asia-Pacific area and the Canadian (“C”) dollar in North America. All adjustments resulting from the translation of the accompanying consolidated financial statements from the functional currency into reporting currency are recorded as a component of stockholders’ equity in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters Non-monetary Non-monetary Segment Information FASB ASC Topic 280, Segment Reporting Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include assumptions used in assigning value to identifiable intangible assets at the acquisition date, the assessment for impairment of goodwill, the assessment for impairment of other intangible assets, the allowance for doubtful accounts, share-based compensation expense, residual value of the lease fleet and deferred tax assets and liabilities. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstances indicate that the previous assumptions and factors have changed. The results of the analysis could result in adjustments to estimates. Cash Equivalents The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash balances. Inventories Inventories are stated at the lower of cost or fair value (net realizable value) and consist of primarily finished goods for containers, modular buildings and mobile offices held for sale or lease; as well as raw materials, work in-process first-in, first-out June 30, 2017 2018 Finished goods $ 25,564 $ 18,971 Work in-process 1,844 1,442 Raw materials 2,240 2,318 $ 29,648 $ 22,731 Derivative Financial Instruments The Company may use derivative financial instruments to hedge its exposure to foreign currency and interest rate risks arising from operating, financing and investing activities. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on the remeasurement to fair value on unhedged (or the ineffective portion of hedged) derivative financial instruments is recognized in the statement of operations. Also, as more fully discussed in Note 5, the Company accounts for the fair value of an embedded derivative in a convertible note that required bifurcation. Accounting for Stock Options For the issuances of stock options, the Company follows the fair value provisions of FASB ASC Topic 718, Stock Compensation non-employee non-employee Fair Value Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 6. Fair value estimates would involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates Property, Plant and Equipment Owned assets Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labor, the initial estimate (where relevant) of the costs of dismantling and removing the items and restoring the site on which they are located; and an appropriate allocation of production overhead, where applicable. Depreciation for property, plant and equipment is recorded on the straight-line basis over the estimated useful lives of the related asset. The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. Property, plant and equipment consist of the following (in thousands): Estimated Useful Life June 30, 2017 2018 Land — $ 2,168 $ 2,168 Building and improvements 10 — 40 years 4,890 4,893 Transportation and plant equipment (including capital lease assets) 3 — 20 years 39,899 43,078 Furniture, fixtures and office equipment 3 — 10 years 10,683 11,959 57,640 62,098 Less accumulated depreciation and amortization (34,252) (39,788) $ 23,388 $ 22,310 Capital leases Leases under which substantially all the risks and benefits incidental to ownership of the leased assets are assumed by the Company are classified as capital leases. Other leases are classified as operating leases. A lease asset and a lease liability equal to the present value of the minimum lease payments, or the fair value of the leased item, whichever is the lower, are capitalized and recorded at the inception of the lease. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the statement of operations. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Capitalized leased assets as of June 30, 2018 and 2017, include gross costs of $6,660,000 and $4,440,000, and accumulated amortization of $3,247,000 and $2,047,000, resulting in a net book value of $3,413,000 and $2,393,000, respectively. Operating leases Payments made under operating leases are expensed on the straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Where leases have fixed rate increases, these increases are accrued and amortized over the entire lease period, yielding a constant periodic expense over the term of the lease. Lease Fleet The Company has a fleet of storage, portable building, office and portable liquid storage tank containers, mobile offices, modular buildings and steps that it primarily leases to customers under operating lease agreements with varying terms. The value of the lease fleet (or lease or rental equipment) is recorded at cost and depreciated on the straight-line basis over the estimated useful life (5 - 20 years), after the date the units are put in service, down to their estimated residual values (up to 70% of cost). In the opinion of management, estimated residual values are at or below net realizable values. The Company periodically reviews these depreciation policies in light of various factors, including the practices of the larger competitors in the industry, and its own historical experience. Costs incurred on lease fleet units subsequent to initial acquisition are capitalized when it is probable that future economic benefits in excess of the originally assessed performance will result; otherwise, they are expensed as incurred. At June 30, 2017 and 2018, the gross costs of the lease fleet were $534,197,000 and $555,263,000, respectively. Units in the lease fleet are also available for sale. The cost of sales of a unit in the lease fleet is recognized at the carrying amount at the date of sale. Impairment of Long-Lived Assets The Company periodically reviews for the impairment of long-lived assets and assesses when an event or change in circumstances indicates the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and the eventual disposition is less than its carrying amount. The Company has determined that no impairment provision related to long-lived assets was required to be recorded as of June 30, 2017 and 2018. Goodwill The purchase consideration of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates (see Note 4). Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles — Goodwill and Other. Pac-Van, The Company assesses the potential impairment of goodwill on an annual basis or if a determination is made based on a qualitative assessment that it is more likely than not (i.e., greater than 50%) that the fair value of the reporting unit is less than its carrying amount. Qualitative factors which could cause an impairment include (1) significant underperformance relative to historical, expected or projected future operating results; (2) significant changes in the manner of use of the acquired businesses or the strategy for the Company’s overall business; (3) significant changes during the period in the Company’s market capitalization relative to net book value; and (4) significant negative industry or general economic trends. Prior to June 30, 2017, if the Company did determine that fair value is more likely than not less than the carrying amount, a quantitative two-step No. 2017-04, impairment test and permitted early adoption for interim or annual goodwill impairment tests performed on dates on or after January 1, 2017. The Company adopted ASU No. 2017-04 During FY 2016, the Company determined that qualitative factors in its North American leasing and manufacturing operations, pertaining primarily to conditions in the oil and gas market, required an update of the step one impairment analysis for Lone Star and Southern Frac. This updated analysis calculated that even though the excess of the estimated fair value of Lone Star over the carrying value of its invested capital declined to approximately 11% of the book value of its net assets, its implied value of goodwill was still greater than its carrying value. However, the Company determined that the implied value of Southern Frac’s goodwill was less than the carrying value of its goodwill, resulting in an impairment charge of $2,681,000 at March 31, 2016. The Company’s annual impairment assessment at June 30, 2017 and 2018 concluded that the fair value of the goodwill of each of its reporting units was greater than their respective carrying amounts. Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions that it believes are reasonable, but are uncertain and subject to changes in market conditions. The change in the balance of goodwill was as follows (in thousands): June 30, 2016 2017 2018 Beginning of year (a) $ 99,344 $ 102,546 $ 105,129 Additions to goodwill 6,367 1,673 5,827 Impairment of goodwill (2,681) — — Other adjustments, primarily foreign translation effect (484) 910 (1,013) End of year (b) $ 102,546 $ 105,129 $ 109,943 (a) Net of accumulated impairment losses of $13,491 at June 30, 2015, and $16,172 at June 30, 2016 and 2017. (b) Net of accumulated impairment losses of $16,172 at June 30, 2016, 2017 and 2018. Goodwill recorded from domestic acquisitions of businesses under asset purchase agreements is deductible for U.S. federal income tax purposes over 15 years, even though goodwill is not amortized for financial reporting purposes. Intangible Assets Intangible assets include those with indefinite (trademark and trade name) and finite (primarily customer base and lists, non-compete non-compete June 30, 2017 June 30, 2018 Gross Accumulated Net Carrying Gross Accumulated Net Carrying Trademark and trade name $ 5,486 $ (453) $ 5,033 $ 5,486 $ (453) $ 5,033 Customer base and lists 47,647 (31,223) 16,424 29,057 (14,150) 14,907 Non-compete 9,622 (6,678) 2,944 9,005 (7,130) 1,875 Deferred financing costs 4,855 (2,250) 2,605 3,522 (1,905) 1,617 Other 4,006 (2,243) 1,763 4,683 (2,965) 1,718 $ 71,616 $ (42,847) $ 28,769 $ 51,753 $ (26,603) $ 25,150 The Company reviews intangible assets (those assets resulting from acquisitions) for impairment if it determines, based on a qualitative assessment, that it is more likely than not (i.e., greater than 50%) that fair value might be less than the carrying amount. If the Company determines that fair value is more likely than not less than the carrying amount, then impairment would be quantitatively tested, using historical cash flows and other relevant facts and circumstances as the primary basis for estimates of future cash flows. If it determines that fair value is not likely to be less than the carrying amount, then no further testing would be required. The Company conducted its review at each yearend, which did not result in an impairment adjustment at June 30, 2017 and 2018, but did result in an impairment write-down at June 30, 2016 of $387,000 to the carrying amount of the trade name recorded at Southern Frac. This write-down is included in the caption “Impairment of goodwill and trade name” in the accompanying consolidated statements of operations. Determining the fair value of intangible assets involves the use of significant estimates and assumptions, which the Company believes are reasonable, but are uncertain and subject to changes in market conditions. The estimated future amortization of intangible assets with finite useful lives as of June 30, 2018 is as follows (in thousands): Year Ending June 30, 2019 $ 5,488 2020 3,755 2021 2,687 2022 2,134 2023 1,474 Thereafter 4,579 $ 20,117 The weighted-average remaining useful life of the finite intangible assets was approximately 9.0 years at June 30, 2018. Defined Contribution Benefit Plan Obligations for contributions to defined contribution benefit plans are recognized as an expense in the statement of operations as incurred. Contributions to defined contribution benefit plans in FY 2016, FY 2017 and FY 2018 were $1,507,000, $1,586,000 and $1,552,000, respectively. Revenue Recognition The Company leases and sells new and used storage, office, building and portable liquid storage tank containers, modular buildings and mobile offices to its customers, as well as providing other ancillary products and services. Leases to customers generally qualify as operating leases unless there is a bargain purchase option at the end of the lease term. Revenue is recognized as earned in accordance with the lease terms established by the lease agreements and when collectability is reasonably assured. Revenue from sales of the lease fleet is generally recognized upon delivery and when collectability is reasonably assured and revenue from the sales of manufactured units are recognized when title and risk of loss transfers to the purchaser, generally upon shipment. Certain arrangements to sell units under long-term construction-type sales contracts are accounted for under the percentage of completion method. Under this method, income is recognized in proportion to the incurred costs to date under the contract to estimated total costs. There were no such arrangements in FY 2017 and FY 2018. Unearned revenue includes end of lease services not yet performed by the Company (such as transport charges for the pick-up pick-up Advertising Advertising costs are generally expensed as incurred. Direct-response advertising costs are monitored through call logs and advertising source codes, are capitalized when paid and amortized over the period in which the benefit is derived. However, the amortization period of the prepaid balance never exceeds 12 months. At June 30, 2017 and 2018, prepaid advertising costs were not significant. Advertising costs expensed were approximately $3,284,000, $3,478,000 and $3,834,000 for FY 2016, FY 2017and FY 2018, respectively. Shipping and Handling Costs The Company reports shipping and handling costs, primarily related to outbound freight in its North American manufacturing operations, as a component of selling and general expenses. Shipping and handling costs totaled $219,000, $172,000 and $483,000 in FY 2016, FY 2017 and FY 2018, respectively. Freight charges billed to customers are recorded as revenue and included in sales. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for temporary differences between the financial reporting basis and income tax basis of assets and liabilities at the balance sheet date multiplied by the applicable tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. The Company files U.S. Federal tax returns, multiple U.S. state (and state franchise) tax returns and Australian, New Zealand and Canadian tax returns. For U.S. Federal tax purposes, all periods subsequent to June 30, 2014 are subject to examination by the U.S. Internal Revenue Service (“IRS”); and, for U.S. state tax purposes, with few exceptions and depending on the state, periods subsequent to June 30, 2012 are subject to examination by the respective state’s taxation authorities. Periods subsequent to June 30, 2014, June 30, 2013 and June 30, 2011 are subject to examination by the respective taxation authorities in Canada, Australia and New Zealand, respectively. Tax records are required to be kept for five years and seven years in Australia and New Zealand, respectively. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change. Therefore, no reserves for uncertain income tax positions have been recorded. In addition, the Company does not anticipate that the total amount of unrecognized tax benefit related to any particular tax position will change significantly within the next 12 months. The Company’s policy for recording interest and penalties, if any, will be to record such items as a component of income taxes. Recently Enacted U.S. Federal Tax Legislation Introduced initially as the Tax Cuts and Jobs Act, the Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Act”) was enacted on December 22, 2017. The Act applies to corporations generally beginning with taxable years starting after December 31, 2017, or the fiscal year ending June 30, 2019 for the Company, and reduces the corporate tax rate from a graduated set of rates with a maximum 35% tax rate to a flat 21% tax rate. Additionally, the Act introduces other changes that impact corporations, including a net operating loss (“NOL”) deduction annual limitation, an interest expense deduction annual limitation, elimination of the alternative minimum tax, and immediate expensing of the full cost of qualified property. The Act also introduces an international tax reform that moves the U.S. toward a territorial system, in which income earned in other countries will generally not be subject to U.S. taxation. However, the accumulated foreign earnings of certain foreign corporations will be subject to a one-time In accordance with ASC Topic 740, Income Taxes re-measured re-measurement Net Income per Common Share Basic net income per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the periods. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential dilutive securities (common stock equivalents) the Company had outstanding related to stock options, non-vested FY 2016 FY 2017 FY 2018 Basic 26,060,823 26,348,344 26,269,931 Dilutive effect of common stock equivalents — — — Diluted 26,060,823 26,348,344 26,269,931 Potential common stock equivalents totaling 2,183,224, 1,635,025 and 5,475,347 for FY 2016, FY 2017 and FY 2018, respectively, have been excluded from the computation of diluted earnings per share because the effect is anti-dilutive. Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 , Revenue from Contracts with Customers Topic 606) 2014-09 2014-09 2014-09 2015-14 No. 2016-08 No. 2016-20 2014-09 2014-09 In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) No. 2018-01 No. 2018-10 No. 2018-11 off-balance No. 2016-02, “right-of-use” right-of-use No. 2016-02 No. 2016-02 option is twelve months or less from July 1, 2018. The Company will continue to evaluate existing renewal options in excess of one year as to the probability of exercising renewal options and is currently evaluating its equipment and other finance leases and its lessor accounting under the new standard. In addition, the Company is evaluating its proposed transition method in accordance with guidance issued by the FASB in July 2018. The Company will continue this effort in a manner to be appropriately prepared for its implementation on or before July 1, 2019. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) No. 2016-09, No. 2016-09 No. 2016-09 tax-effect In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities No. 2017-12 non-financial No. 2017-12 No. 2017-12 |